OFFICE OF HAWAIIAN AFFAIRS ʻŌlelo Hōʻike ʻAha Kau Kānāwai Legislative Testimony HB499 HD2 SD1 RELATING TO LEASE EXTENSIONS ON PUBLIC LAND Ke Kōmike ʻAha Kenekoa o ke Kiʻina Hana a me nā Kumuwaiwai Senate Committee on Ways and Means ʻApelila 7, 2021 9:45 a.m. Lumi 211 The Office of Hawaiian Affairs (OHA) OPPOSES HB499 HD2 SD1, which would authorize century-long leases that bind the hands of the Board of Land and Natural Resources (BLNR) from fulfilling its fiduciary obligations of due diligence and undivided loyalty, in maximizing the beneficial disposition of lands leased for commercial, industrial, resort, mixed- use, and governmental purposes throughout the entire state. OHA notes that it also opposes nearly identical bills this year, and likewise opposed nearly identical bills last year and in 2019 for these same reasons, as described further below. Should the Committee choose to move this measure forward, OHA does offer amendments below that would mitigate our concerns and opposition. 1. Act 149’s “pilot project” has not been completed or evaluated; allowing forty-year lease extensions for any and all commercial, industrial, resort, mixed-use, and government leases of public lands across the state may be premature. As a preliminary matter, OHA notes that the legislation this measure is purportedly based on, Act 149, was enacted in 2018 as a “pilot project” to determine whether public land lease extensions in the dilapidated “Hilo community economic district” can “facilitate efficient and effective improvement, and economic opportunity,” and whether such an approach “can be replicated in other areas of the State.” However, rather than wait for the pilot program to conclude, this measure would summarily expand much broader lease extension authorities for any and all commercial, industrial, resort, mixed-use, and government leases of public lands throughout the entire state. Such an expansion appears premature given Act 149’s acknowledged need to first assess whether any redevelopment benefits from its lease extension provisions “can be replicated in other areas of the State.” Indeed, there are several considerations that may need to be assessed from Act 149’s pilot project, including but not limited to: • Whether redevelopment occurs in a timely manner as a result of its lease extension authorities; • Whether the cost-benefits to the State and the public, including opportunity costs, foreclosed revenue increases from real estate market changes, and foregone 1 equity in existing and new improvements that would otherwise revert to the State justify the long-term placement of public lands under private control; • Whether 40-year extensions of lease terms and fixed rental periods are necessary to obtain redevelopment financing; • Whether specific conditions, contingencies, safeguards, or other considerations should be considered in the development of extension terms and conditions; and • Whether any replication of its lease extension authority should be limited to certain leases or circumstances. Accordingly, OHA strongly recommends that the Committee allow for an appropriate assessment of the potential unintended consequences, cost-benefits, and other lessons from Act 149, before expanding much broader lease extension authorities to all other commercial, industrial, resort, mixed-use, and government public land leases throughout the islands. 2. This measure may authorize leases that violate the State’s fiduciary obligations under the public trust and public land trust, and lead to the alienation of public and “ceded” lands. Under Article 11, section 1 of the Hawaiʻi State Constitution and Chapter 171, Hawaiʻi Revised Statutes (HRS), the State through the BLNR holds in trust approximately 1.3 million acres of public lands, including the natural and cultural resources they contain, for the benefit of present and future generations. Much of these lands are also subject to the Public Land Trust created by Article 12 of the Hawaiʻi State Constitution and section 5(f) of the Admission Act, which requires that a portion of revenues derived from Public Land Trust lands be dedicated to OHA, for the purpose of bettering the conditions of Native Hawaiians. The trust status of these lands imposes upon the BLNR specific fiduciary obligations of due diligence and undivided loyalty in ensuring its trust corpus is productive and that its benefits are maximized for Native Hawaiian and public beneficiaries. By authorizing the extension of commercial, industrial, resort, mixed-use, and government public land leases – many of which may already have been held by their respective lessees for the better part of a century – for up to 40 years, this bill may invite century-long leases that substantially inhibit the BLNR from fulfilling its fiduciary obligations, and otherwise ensuring the best and most appropriate uses of lands subject to the public trust and public land trust. For example, this measure could allow public land leases first issued for 65 years, to be extended for an additional 40 years, with fixed rental periods for the same amount of time. This could result in the use of public lands by private entities for 105 years, without any rent reopening for over a generation, so long as the BLNR agrees to lessees’ proposals to make “substantial improvements to the existing improvements or constructing new substantial improvements.” Notably, the lack of an aggregate lease length cap as well as any prohibition on additional lease extensions could allow lease terms and fixed rent periods to be repeatedly extended, for an indefinite length of time, further drawing into question the ability of future generations to ensure the appropriate disposition of public lands – something that even Act 149 does not allow. The fact that commercial, industrial, resort, and mixed-use lands may have the highest revenue potential of the State’s land inventories only further exacerbates the concerns underlying this measure’s lease extension provisions. 2 In addition to tying the State’s and future generations’ hands in ensuring the appropriate use of and realization of revenues from public trust and Public Land Trust lands, the excessively long-term leases that would be authorized under this measure may lead to a sense of entitlement among lessees that can result (and has resulted) in the alienation of public lands, including “ceded” lands to which Native Hawaiians have never relinquished their claims. OHA objects to the sale or alienation of “ceded” lands except in limited circumstances and therefore has significant concerns over any proposal that may facilitate the dimunition of the “ceded” lands corpus. Accordingly, OHA urges the Committee to decline to adopt the unlimited and relatively unconditioned 40-year lease term and fixed rent period extensions that would be authorized for public lands, including public land trust and “ceded” lands, leased for commercial, industrial, resort, mixed-use and government purposes. 3. Under this measure, lease extensions would be authorized for a much broader range of justifications than even Act 149 contemplates. Finally, OHA notes that the Act 149 pilot program explicitly and specifically requires any extension of lease terms or fixed rent periods to be only “to the extent necessary to qualify the lease for mortgage lending or guaranty purposes,” and “based on the economic life of the substantial improvements as determined by the [BLNR] or an independent appraiser.” In contrast, this measure would in fact broadly allow for lease extensions “in order [for the lessee] to make substantial improvements,” “based upon the substantial improvements to be made.” While such language would provide substantially more flexibility than Act 149 in granting lease term length and fixed rent period extensions, it would also allow for extensions in situations where the State’s interest in the redevelopment of leased parcels are not commensurate with the benefits such extensions would grant to a private entity. Under this measure, a lessee may apply for and receive extensions that exceed the time necessary to secure redevelopment financing, and that exceed their improvements’ useful life. Accordingly, this measure does not just expand the geographic scope of Act 149’s extension authority and remove Act 149’s limitations on total aggregate lease lengths, but would further authorize extensions to be based on a broader range of justifications that, due to political pressure or other reasons, may undermine the State’s and public’s interests in the development and disposition of its lands for generations at a time. 4. Critical amendments are necessary to minimally uphold the State’s fiduciary obligations and the interests of Native Hawaiians and the public in the disposition of public lands under this measure. In light of the above concerns, should the Committee nevertheless choose to move this measure forward, OHA strongly urges the inclusion of amendments to uphold the BLNR’s fiduciary obligations under the public trust and public land trust, and to provide concrete safeguards to protect the interests of the State, Native Hawaiians, and the general public in our islands’ limited land base. Such amendments should minimally include: 3 • An effective date that coincides with the end date of the “pilot project” established under Act 149 (June 30, 2026), and a sunset date to limit the provisions of the bill to the length of time currently contemplated: o By amending page 6, line 14, to read as follows: “SECTION 4. This Act, upon its approval, shall take effect on July 1, 2026.” • A limitation on the maximum aggregate fixed rent period and lease term for a lease to be no more than 20 years beyond the original fixed rent period and/or lease term, which should be sufficient for financing purposes and which would reduce the potential for foreclosing future substantial revenue generating opportunities: o By amending page 4, lines 10-12, to read as follows: “(d) Any extension of a lease pursuant to this section shall be based upon the economic life of the substantial improvements to be made as determined by the board or an independent appraiser and shall not extend the fixed rental period of the original lease by more than twenty years.